No Predictions, Just Observations

• Lots of debt, public and private, has been created and "must be" repaid or refinanced (or not).
• When you "invest" in bonds you're lending money.
• Leveraged share repurchases have substituted productive investment (capex).
• Risk premiums (term, credit, inflation, liquidity) are thin or non existent: we're not being compensated adequately for the risks we're assuming, there's no real margin of safety.
• Today's US equity valuations are extreme and unsustainable unless one believes that the conditions "created" in the last 5 years will be continued indefinitely.
• Today's valuations ALWAYS have an impact on tomorrow's returns.
• There IS a difference between value and price.
• Momentum can be negative too...things that can't continue indefinitely eventually end.
• Complacency and overconfidence are the fruits of incomplete analysis and lack of critical thinking.
• Greece has been a problem for 4 or 5 years.
• Initial conditions matter more than predicting the future.
• Herding behavior exists...crowded trades sew the seeds of there own destruction.
• Liquidity and volume are not the same.
• Liquidability matters.
• There may be a buyer for every seller but perhaps not at every price point or risk level.
• Cash seems like a bargain with respect to the value (and opportunity cost) of other risk free and risky assets.
• Things, as always, are unpredictable and complicated.

Insolvency Isn't Readily Observable...Until It Is

Overnight deposits at the BCE are at all time highs and the collateral posted at the BCE is of dubious quality at best. European banks are still under capitalized and are hoarding liquidity when what they need is more capital / less leverage. The CEE is further from, not closer to an agreement on a Fiscal Union, Greece is a walking corpse. Economic growth in the Eurozone is screeching to a halt, etc., etc.


Taken in isolation, these are interesting, if not worrisome data points. Combined in a complex evolving system these anecdotes could provide the catalyst and / or accerlant for a potentially very negative outcome (or not).  But maybe we should take Pascal's advice and stop worrying about the probabilities of the various outcomes and start focusing on the consequences of an improbable but very negative outcome.  Maybe it's time to weigh and not to count. It's a bit like the difference between capital (solvency) and liquidity.